Market Behavior
Dear Readers,
It may seem a commonplace, but I think we do well to remind ourselves at times that prices produced by the marketplace are themselves the product of human behavior. Here we find a conglomerate of market participants, with all their hopes and dreams, as well as their fears and anxieties, in a vast collective enterprise. Though the activity is conducive to the building of great wealth, any familiarity with market history also shows it fraught with risk, for at the interface of the market, we find buyers and sellers looking to profit from the various activities of investing, trading and [dare I say it] gambling. It’s here in this behavioral aspect of the market, where the madness of crowds comes to the fore to counter-balance what we all too often can focus on - the wisdom of them. It will not be the intention of this article to illustrate that markets are comprised just as much of passion as they are of wisdom/ rationality [surely a truism], but to show how this ‘dichotomy’ between speculation on the one side, and fundamentals on the other, affects price. This is to reject the conventional ‘either/ or’ reductive mode of proceeding that we are all too often asked to buy into [are markets rational or irrational?]. Rather, as I’ve outlined earlier, any progress to be made in the field of rational enquiry more often than not results from synthesis. I’ll also seek in the course of this article to provide another take on the ‘fundamentals’, where it can all too often get caught up in the speculative side of equation.
No factor is more responsible for having an overly optimistic outlook on price than the perceived fundamentals. Left unchecked, we can get carried away with our own airy speculations, and like the Baron Von Munchausen, imagine ourselves lifted clear out of the bog of reality by our own efforts.
A focus on fundamentals is in itself fine, for why else would we be confident of investing in something. And yet when they become the sole and exaggerated focus, to the exclusion of all else, we start going down that proverbial and claustrophobic rabbit-hole. The fundamentals turn into a narrative, unchecked and disconnected from reality altogether [rabbit holes make their own reality]. Ever higher prices are explained by an ever deeper and labyrinthine narrative, though still simple enough [or over-awing enough] to provide clarity and certainty. That is until reality bites, and the lower prices come catching out those that bought high. Of course, all of this is part and parcel of human/ market behavior. It is through these enthusiasms that prices rise higher in the aggregate by which the savvier speculator and indeed long-term investor profits - no capitalization without speculation.
The savvier speculator becomes a more discriminate buyer. As opposed to a sole focus on the fundamentals, this breed of buyer has more of a bi-focal view on both the rational fundamentals AND the irrational exuberance that comes with speculative markets. With a healthy dose of skepticism on the one side, they will look askance at the more exuberant of narratives whipping the more gullible into a buying frenzy. That said, they’ll also on the other side maintain a healthy dose of confidence and keep an eye on the more sober of narratives outlining the case for a continued and more modest trend upward. What you have here is something of the balancing act of the agile high tight-rope walker with the opposing forces of speculation and fundamentals on contrary sides…. not to mention risk below and fame and fortune beyond.
At this point, the reader might be thinking this may all be fine and dandy, and a more sensible explanation of price development, and yet be left asking if this is not just another narrative. And yes, this would surely be the case if it weren’t backed up by the chart, which is effectively our reality principle. I would also hazard to say that the chart can also function as something of a substitute for our ‘fundamentals’, which left to themselves can go awry in the services of speculative hype. As shown in the long-term chart of Bitcoin below, we can effectively divide in half the logarithmic growth curve/ LGC [that has so far been the development in BTC price]. The upper half can be identified with speculative excess, which provides the impetus for further price discovery. It is the level of the following corrections however, at the base of the curve, that could be said to reflect the realized/ fundamental [foundational] price of BTC in its onward march towards price discovery. Here I am making out a case for a variant of ‘fundamentals’ to be used on the technical/ charting side of the ledger. The intention being to tie them down to price [as opposed to narrative], lest, like the statues of Daedalus, they fly away from us when unobserved as they are wont to do on the speculative side of the ledger.
Zooming in a little, you can see the the yellow line bisects the LGC, and the heavy dotted green line marks the top of what I’ve referred to as the ‘buy zone’ for 3 years now. Given the principle of diminishing volatility in the macro, this yellow line may well mark the buying point for prospective buyers, i.e.; price may not go as low into the buy zone. Besides this principle, we also have the recent price history - as you can see, price only briefly dipped to the bottom of the buy zone from 2018- 2020. Most of that time, price hovered on the heavy green line, where it functioned more as a mean of price [if price were to continue its present descent, it would meet that line at 25K in May].
On the basis of the LGC realized/ fundamental price, a buy around the 25K area would represent a reasonable investment [for those that had not bought earlier]. The investor with this model in mind would’ve bought earlier between 2019-2029, but would have held back once price got going in the parabolic mode in 2022 waiting for a correction. Of course, the late entrant would always have been in a quandary here being concerned about risk to both the upside and downside, and may have bought a little on the way up in order to cover that risk.
But that is all in the past, and most investors, sellers, and prospective buyers are more interested in considering what price is likely to do going forward. As is typical on corrections, when the sentiment swings, many will start calling for ever lower prices… and may even start doubting the project of BTC altogether. Once again, the LGC model comes into play. Not only does it caution the buyer when price gets toppy, but it emboldens the buyer on the downside, right when no-one is wanting to buy. As mentioned earlier, with the chart replacing the fundamentals [that too often can become a disconnected narrative], it will enable a confident [though uncertain] buy. It becomes reasonable to buy on the basis of the chart, as it has shown a history of what might be called speculative episodes [cycles] followed on by heavy corrections. Within reason, the correction is to be bought. This idea of speculative excess followed on predictably by its correction was expanded on a year back in Could Bitcoin be a Bubble. In short, I argued that BTC wasn‘t a bubble per se, but rather that it exhibited ‘bubble-like’ behavior at times. Within this scheme, price development is perceived as a synthesis between the a more pragmatic ‘fundamentals’ [read technical/ price foundation] and the behavioral excesses of speculation that all too often get caught up in so-called fundamentals.
Summary
The reader may be somewhat surprised that I refer to the fundamentals of BTC in a more technical manner in this article. But strictly speaking, I am referring to the fundamentals [foundations] of BTC price [as shown on the chart]. Sure, it is a novel and experimental approach, but one I think worth making considering how fundamentals as narrative can go [and have gone] so wrong. As far as fundamental narrative goes, it can only tell us that Bitcoin is valuable, and become more so in the marketplace [due to monetary scarcity]. It can not tell us anything of actual price development, or the rate at which it could appreciate [s2f was one attempt to do so]. In my opinion, this must be left to the technicals of the chart. This is something that is going to appeal more to the conservative institutional money that needs to come into the space in order for it to move higher. A continual mantra of the fundamentals is hardly likely to encourage them given the recent record. From the pragmatic investor’s perspective, which I’ve taken here, fundamental narrative belongs more to the driver of the speculative episode, to the parabolic moves, not to the greater trend in the aggregate [where is to be found fundamentals of realized price]. Narrative can say price will increase, but not at what rate, or, most importantly, whether the current rate is sustainable.
Though some might in turn disparage technical analysis, any apparent disrepute it has come into lately was largely due to its actually being enlisted into the cause of fundamentals/ narrative as was seen in the proliferation of all those moon charts. Of course, such charts are not TA at all but are memes, designed to appeal to emotion not reason. The proponents of such are marketing the chart instead of charting the market. Insofar as you think charting the market is possible, it involves a much more disinterested and objective approach as was described in some depth here.
In sum, if we can keep an eye on both the fundamental value of bitcoin, on the one hand, and the excessive bubble-like speculations in it on the other [no capitalization without speculation], and as they are both played out on the chart, then we have a much better chance of optimizing our profits in this most fascinating of monetary experiments. For those however, for whom the fundamentals have become an object of faith, where the fundamentals have morphed into fundamentalism, and where that has lulled them into a sense of certainty, this rational analysis will fly over their heads. The chart keeps it real, where on the one hand you have the uncertainty principle [inherent to TA], and on the other you have the mapping of human behavior [as reflected in prices] with all its rationality and irrationality.
For more on investing and trading the alt coins, feel free to enquire via a DM to my Twitter account - @davthewave
Until next time,
Stay [relatively] safe out there,
Dave the Wave.